S.E.C. Gets Encouragement From Jury That Ruled Against It

As Beau Brendler sat in the jury box listening to the government's case against a former Citigroup midlevel executive, the same question kept entering his mind.

“I wanted to know why the bank's C.E.O. wasn't on trial,” said Mr. Brendler, who served as the jury's foreman. “Citigroup's behavior was appalling.”

Despite that sentiment, Mr. Brendler and his fellow jurors - a group that included a security guard, a lab technician and a full-time musician in a rock 'n' roll band - cleared the former Citigroup executive, Brian Stoker, of wrongdoing over his role in selling a complex $1 billion mortgage bond deal during the waning days of the housing boom.

But even as the jury reached a consensus that the Securities and Exchange Commission failed to prove its case, it was left with an uneasy feeling that the verdict inadequately described its feelings about Citigroup's conduct.

“We were afraid that we would send a message to Wall Street that a jury made up of regular American folks could not understand their complicated transactions and so they could get away with their outrageous conduct,” Mr. Brendler said. “We also did not want to discourage the government from investigating and prosecuting financial crimes.”

So the jurors did something extremely rare: They issued a statement alongside their verdict.

“This verdict should not deter the S.E.C. from continuing to investigate the financial industry, review current regulations and modify existing regulations as necessary,” said the statement, which was read aloud by Judge Jed S. Rakoff in Federal District Court in Manhattan on Tuesday.

Mr. Brendler, a 48-year-old freelance writer, wrote the sentence after soliciting input from the seven other jurors. He scratched it out on a yellow sheet ripped from a legal pad, wrapped it around the verdict form and put both in a sealed envelope that was delivered to the judge.

“It wasn't a particula rly eloquent statement, but we hoped it would get a point across,” Mr. Brendler said.

In an informal survey of 11 defense lawyers and prosecutors, not one could recall a case when a jury had issued a statement like the one that the Stoker jury did. Dennis M. Kelleher, a former litigator at Skadden, Arps, Slate, Meagher & Flom, said that the jury's admonition underscored the nation's prevailing sentiment about the financial services industry.

“These eight ordinary citizens believed what the polls tell us most Americans believe,” said Mr. Kelleher, who now serves as president of Better Markets, a lobbying organization pressing for regulatory reform. “They still would be delighted to see the government hold these banks and some of their executives accountable for misconduct during the financial crisis.”

Mr. Stoker's trial was one of the few cases related to the financial crisis that has gone to a jury. The case was brought alongside a civil fraud law suit accusing Citigroup of misleading clients about a 2007 investment in a collateralized debt obligation, or C.D.O. Citigroup was among the leaders in structuring these complex securities, which were pools of mortgages sliced up into pieces and sold off to investors. The bank marketed more than $20 billion worth of C.D.O.'s, earning enormous fees.

It is widely acknowledged that C.D.O.'s were a root cause of the financial crisis, stoking the demand for subprime mortgages and inflating the housing bubble. The securities also ended up on balance sheets of the large banks, saddling them with crippling losses when the housing market collapsed.

A questionable tactic used by Citigroup and several other banks was at the heart of the Stoker case. Some banks stuffed C.D.O.'s with risky mortgage securities, sold them to unsuspecting customers and then bet against them.

Regulators said that Mr. Stoker, 41, knew or should have known that he was deceiving investors by n ot disclosing that Citigroup helped pick the underlying mortgage bonds in the C.D.O. and then bet that its value would decline. When the housing market collapsed, Citigroup's clients lost money while the bank made a bundle.

Citigroup, which is under new management, agreed to pay the government $285 million to resolve its role in the case, but the settlement has yet to receive court approval. Mr. Stoker, however, took his case to trial.

A spokesman for Citigroup said it agreed with the verdict in Mr. Stoker's case and hoped to get judicial approval of its settlement.

Travis Dawson, 23, a student at Baruch College, also served on the Stoker jury. Before the trial, Mr. Dawson, a lifelong Bronx resident, had been largely uninformed about the ways of Wall Street.

“Where I'm from, you hear Wall Street is an evil place but you really have nothing to base that on,” Mr. Dawson said. “But after sitting on the jury I thought, ‘Wow, greedy, reckless behav ior really does happen there.' ”

In explaining the verdict, both Mr. Dawson and Mr. Brendler said that they believed that Mr. Stoker was made a scapegoat for the industry's sins. In his closing statement, Mr. Stoker's lawyer, John W. Keker, hammered away at that point, arguing that his client “shouldn't be blamed for the faults of banking any more than a person who works in a lawful casino should be blamed for the faults of gambling.”

Mr. Keker underscored this point by showing the jury an illustration from “Where's Waldo?,” the children's book in which readers are challenged to find the hidden title character. He likened his client to Waldo, suggesting that Mr. Stoker was merely a blip in Citigroup's vast C.D.O. universe.

“Most of this trial had nothing to do with Brian Stoker,” Mr. Keker said.

Mr. Dawson said that the “Where's Waldo?” allusion resonated.

“I'm not saying that Stoker was 100 percent innocent, but given the cr azy environment back then it was hard to pin the blame on one person,” Mr. Dawson said. “Stoker structured a deal that his bosses told him to structure, so why didn't they go after the higher-ups rather than a fall guy?”

With the trial now finished, the foreman, Mr. Brendler, who lives in Patterson, N.Y., in northeast Putnam County, is back looking for full-time work. He hasn't held a steady job since 2009, when Consumer Reports laid him off.

He was heartened to see that the S.E.C.'s director of enforcement issued a statement after the verdict that it respected the jury's decision and would continue to pursue misconduct arising out of the financial crisis. And on Thursday, the S.E.C. lawyers who tried the case called him to ask how they could be more effective.

“I'm glad they're taking this seriously because the industry seemed completely out of control with no oversight,” Mr. Brendler said. “Wall Street's actions hurt all of us and we badly nee d a watchdog who will rein them in.”

Week in Review: Calls for Change to a Complex Market

AC/DC WEEK IN VERSE Catch up on Knight Capital's stumbles and then put on your headphones for AC/DC.

Calls for stronger regulations of the computer-driven markets were renewed after the third stock trading catastrophe in the past five months. “Among the proposals that gained momentum were stringent testing of computer trading programs and a transaction tax that could reduce trading,” Nathaniel Popper and Peter Eavis reported.

A look back on our reporting of the past week's highs and lows in finance.

24 Hour Fitness Is Said to Be for Sale | Forstmann Little has hired Goldman Sachs to run the auction process, Peter Lattman reported. The chain is expected to fetch about $2 billion in a sale. DealBook '

DealBook Column: Suggestions for an Apple Shopping List | Andrew Ross Sorkin offers some must-buys and some pie-in-the-sky targets that the company's chief may want to conside r. DealBook '

With a stock market value of $13.5 billion, Sprint can be purchased for a song. Apple could easily spend four times more than that - say, $50 billion - to build out the Sprint network and turn it into a showcase for the next generation mobile technology. Apple could still offer its devices on other carriers, but its premium product would exist on its own network.

Chinese Internet Group Is Said to Be Close to Raising $8 Billion | “Alibaba plans to use the bulk of that new money to buy back a 20 percent stake in itself from Yahoo for $7.1 billion,” Evelyn M. Rusli and Michael J. de la Merced reported. DealBook '

Errant Trades Reveal a Risk Few Expected | Knight Capital rushed to develop a computer program so it could take advantage of a new Wall Street venue. But the firm ran up against its deadline, Nathaniel Popper and Peter Eavis reported. DealBook '

Trying to Stay Nimble, Knight Capital Fumbles | Thomas M. Joyce, an unapologetic advocate of electronic trading, is fighting for his company's survival, Jessica Silver-Greenberg and Ben Protess reported. DealBook '

Société Générale's Profit Falls Below Expectations | Analysts are waiting to see whether the big French bank sells TCW Group, a fund firm in Los Angeles, Liz Alderman reported. DealBook '

Deal Professor: In Picking Facebook Shares, Repeating Past's Mistakes | Steven M. Davidoff says that “individual investors lose out consistently when they buy and trade individual stocks. They're better off investing in passive index funds.” DealBook '

Perhaps Mr. Cramer's show could begin each segment with a note spelling out how much investors lose when they trade on their own.

Profits Plunge at Two European Banks | “Deutsche Bank of Germany and UBS of Switzerland both were hit by drops in trading activity,” Mark Scott and Jack Ewing reported. DealBook '

A Hedge Fund T oo Big to Profit | Louis M. Bacon admitted defeat and returned about $2 billion, or 25 percent of the main fund he manages at Moore Capital Management, to his investors, Landon Thomas Jr. reported. DealBook '

It is hard to figure out how to invest when actions taken by politicians can affect financial markets more than basic economic factors, he said.

The Offspring of the Tiger | “In a relatively young industry where stars can quickly fade, Tiger Management - and its myriad affiliates like Falcon Edge - is the closest thing to a hedge fund dynasty,” Ms. Rusli and Azam Ahmed reported. DealBook '

JAL Plans an IPO to Raise $8.5 Billion | “At that price, it would easily be the second-largest I.P.O. this year, after Facebook,” Hiroko Tabuchi reported. DealBook '

Japan Widens Inquiry Into Insider Trading | A government investigation has extended onto the trading floors of Goldman Sachs, UBS and Deutsche Bank, Ms. Tabuchi and Peter Lattman reported. DealBook '

Bristol-Myers Executive Is Accused of Insider Trading | Federal prosecutors said Robert D. Ramnarine had profited from confidential information about pending deals by the pharmaceutical company, William Alden reported. DealBook '

MF Global Trustees Differ Over Amount Customers Will Be Repaid | James W. Giddens told lawmakers that a $1.6 billion gap remained. Another MF Global trustee, Louis Freeh, referred to the $1.6 billion gap as an “alleged shortfall,” Mr. Protess reported. DealBook '

The Trade: As Banking Titans Reflect on Errors, Few Pay Any Price | Jesse Eisinger of ProPublica says it is astonishing that Wall Street bankers seem not to have paid any social cost. DealBook '

If you are rich, you must be intelligent. Your views must be worthwhile, never mind the track record.

Jury Clears Ex-Manager at Citigroup in Debt Case | The jury rejected the S.E.C.'s case, concluding tha t Brian Stoker was not liable under the securities laws, Mr. Lattman reported. The jury also issued an unusual statement. DealBook '

“This verdict should not deter the S.E.C. from investigating the financial industry, to review current regulations and modify existing regulations as necessary,” said the jury's statement.

TD Ameritrade And Scottrade Resume Sending Orders to Knight

Two major brokerage firms said on Friday afternoon that they have resumed sending client orders to the Knight Capital Group, in a potential boost of confidence for the beleaguered trading firm.

TD Ameritrade and Scottrade said separately that they were again routing trades to Knight, after having pulled their business from the firm on Thursday. Many of Wall Street's biggest brokerage firms had withdrawn, unsure of the firm's state after it disclosed a $440 million loss tied to a trading software glitch.

“After considerable review and discussion, we are resuming our order routing relationship with Knight,” Fred Tomczyk, TD Ameritrade's chief executive, said in a statement. “Our priority has always been the interests of our clients, their trades and their assets. Knight is one of many order routing destinations for us and has long been a good and trusted partner.”

Whitney Ellis, a spokesman for Scottrade, said his firm had begun sending orders to K night around 12:35 p.m. on Friday.

It is not clear whether other clients have returned as well. Earlier on Friday, representatives for Vanguard and E*Trade said that they had had not.

On Thursday, Knight had asked some of its clients to stop sending it orders, while it retested its systems. But on Friday, firm executives called other trading shops, assuring them that it had locked up financing to operate throughout the day and asking them to resume routing client orders.

The firm has contacted a number of potential buyers for at least some of its businesses, as it races to stabilize its finances through the weekend. Knight and its advisers have been soliciting potential suitors for various parts of its businesses, including rivals like Citadel and Virtu Financial, according to people briefed on the matter.

Shares in Knight were up by 62 percent as of midafternoon trading, at $4.15. They had plummeted 75 percent between Wednesday, when its trading sof tware broke down, and Thursday, when it disclosed the $440 million loss.

The Long-Term Value of Internet Companies

Bill George is a professor of management practice at Harvard Business School and a former chairman and chief executive of Medtronic.

A decade after the last technology bubble burst, the signs are everywhere that it is happening again.

Look at what's happened to the highly publicized initial public offerings: Facebook's value has declined $30 billion since its I.P.O., costing investors nearly half their investment. Zynga shares have plummeted. Groupon shares trade at such an extreme discount that there should be a Groupon for them. Pandora's stock, once $17, has touched $7. Companies like Friendster and MySpace, meanwhile, toil in oblivion.

These declines didn't have to occur. Creating new markets is a messy, fast-moving process in which many companies will collapse. Instead of mourning Facebook's inability to surpass the market capitalization of General Electric, we should be celebrating the success of companies that have navigated early-s tage minefields.

An aggressive approach to early-stage venture investing has led to a bubble in start-up financing. Financial analysts of these growth companies make a host of assumptions to project performance to justify outsize valuations.

As a consequence, promising young companies like Groupon and Zynga get overvalued. To support its I.P.O. valuation of nearly 100 times its earnings, Facebook would have to sustain an unrealistic growth rate. Even at its lower valuation, Facebook's market capitalization is 12 times its revenue. Last week, Facebook reported respectable growth across all its important metrics: new users, active users, total advertising revenue and operating income. Yet, the vicissitudes of volatile markets caused its stock to decline 12 percent after its earnings announcement.

In a prudent financing environment, investors would be banking on Facebook's future instead of wondering why it had lost so much of its I.P.O. value. Critics h ave argued that Facebook's backers increased value for the company's original investors by aiming for the highest valuation during the I.P.O. Did they lose sight of the importance of creating long-term value by having a base of stable committed shareholders who understand the business and are focused on its long-term success?

As we learned during the financial crisis, speculative traders looking for outsize returns can increase the volatility of company valuations. In turn, management gets trapped into trying to justify excessive valuations by focusing on short-term results. These huge swings in valuation have consequences. They jeopardize acquisitions. They demoralize employees who are compensated with stock. Most important, they distract senior leaders from their real job: creating great products that serve their customers.

Entrepreneurs who want to build for the long term should avoid going public until they have positioned themselves as market leaders with diverse and stable revenue streams. Even then, they shouldn't strive to notch 80 times price-to-earnings ratios or a 100 percent pop in its shares on the first day of trading. Google is a classic example of the right way to go public. It delayed going public until six years after its founding. Since its I.P.O. in 2004, Google stock has moved steadily upward, rewarding its investors with a 500 percent return. Google's $200 billion market capitalization is justified by $40 billion in revenue and $10 billion of net earnings.

Rather than trying to maximize the value of their I.P.O.'s, start-ups should align themselves with capital partners who are builders themselves, interested in sustainable growth and wary of unrealistic valuations. They should select board members committed to the long-term success of the company, compensating their directors with restricted stock. Founders should accept lower valuations in order to attract the right investors â€" financial partne rs who will invest in the brand, research and development and operational engine to create sustainable competitive advantage.

The striking example of Warren E. Buffett contrasts markedly with what we observe happening with the social media start-ups. Mr. Buffett cautions his investors about overpaying for assets and often talks down expectations for Berkshire Hathaway stock. He has taken the high road in treating his shareholders like long-term business partners. While shareholders don't get one-time pops, they have compounded earnings at more than 20 percent a year for 50 years.

These days, the scrutiny of public company leaders is intense, and public markets are unforgiving. The high turnover in hedge fund portfolios makes Wall Street a place where fortunes are made, not where businesses are built.

In contrast, the best entrepreneurs are business builders. They should keep a laserlike focus on precisely that and never deviate to please short-term trade rs.

New York Fed Faces New Scrutiny on Rate-Rigging Scandal

The Congressional scrutiny of the Federal Reserve intensified this week, as the regulator faced new questions about failing to prevent banks from manipulating interest rates.

In a letter to the New York Fed and the Federal Reserve Board in Washington, Senator Sherrod Brown challenged the regulators to defend their response to the rate-rigging scandal. Mr. Brown has questioned why the New York Fed, despite knowing that some banks were reporting false rates, pushed for broad reforms of the rate-setting process rather than penalizing the illegal behavior.

For their part, Fed officials have argued that they lacked the power to pursue the issue further. Mr. Brown, an outspoken critic of lax regulation, was unconvinced.

“It is difficult to accept the argument that the board has no authority to address this problem,” he wrote. Mr. Brown also outlined a series of questions for the regulators, asking them detail what attempts, if any, they made to thwart the wrongdoing.

An Ohio Democrat who sits on the Senate Banking Committee, Mr. Brown is the latest lawmaker to scrutinize the New York Fed's role in the rate-setting conspiracy. But unlike most of the past lawmakers who have voiced concerns in recent weeks, Mr. Brown is a Democrat.

Republicans seized on the issue in recent hearings with Timothy Geithner, the current Treasury secretary who ran the New York Fed at the time of the rate-rigging. Mr. Geithner was grilled on the scandal, which received focus in June when authorities in the United States and London snared a $450 million settlement from Barclays.

The British bank was accused of trying to manipulate the London interbank offered rate, or Libor, a key benchmark that affects the cost of trillions of dollars in loans. The case against the British bank was the first action to stem from a global investigation into more than a dozen banks.

Following the Barclays case, House Republicans demanded that the New York Fed detail its knowledge of the wrongdoing at Barclays.

In releasing e-mails and transcripts of phone calls, the regional Fed bank revealed that it learned in April 2008 that Barclays was artificially depressing its Libor rates to deflect concerns about its health. “We know that we're not posting um, an honest” rate, a Barclays employee told a New York Fed official at the time.

In response, Mr. Geithner pushed changes to the Libor process. He did not, however, refer the illegal actions to the Justice Department.

The various revelations, Mr. Brown said in the letter, raise “troubling questions regarding regulators' willingness to supervise and regulate the world's largest banks.”

The Fed did not respond to a request for comment.

“The board clearly has policies requiring banks to have effective controls, yet, in spite of these policies, it appears that Barclays escaped any meaningful supervision over its U.S. activities,” Mr. Brown wrote.

Knight Said to Hold Talks to Sell Futures Brokerage Unit

The Knight Capital Group is in talks to sell its futures brokerage unit with potential buyers, including Chicago-based R.J. O'Brien, people briefed on the matter told DealBook on Friday.

The deal discussions come amid heavy losses sustained by the Knight Capital after a computer glitch on Wednesday prompted the firm to make errant trades that cost it $440 million. Talks are ongoing and may still fall apart, these people cautioned.

Knight and its advisers have been holding discussions with a number of firms about their interest in buying pieces of its businesses. While the embattled trading firm has told trading customers that it has lined up financing to support the company through Friday, it is working to lock up a number of transactions or capital-raising efforts through the weekend.

Much of the futures division is comprised of operations that Knight purchased from Penson Worldwide only two months ago. Penson, a troubled securities firm, was seeking to sell off assets to raise capital. Regulators are also keeping a close eye on the futures unit, and examiners from the Commodity Futures Trading Commission are in the firm's offices.

The oversight comes after two prominent futures brokerages have collapsed in the last year. MF Global, which filed for bankruptcy last October, misused about $1 billion dollars in customer money before it's collapse. PFGBest, an Iowa-based firm, went under this summer after revelations that the chief executive of the firm had been misusing customer money.

R.J. O'Brien, which holds about $3.7 billion in client money, would be a natural buyer of the Knight's futures business. The firm, based in Chicago, is one of the oldest futures clearing firms in the country.

Among the other companies that have been in contact about buying at least some parts of Knight include Citadel, Virtu Financial and Peak6, the people briefed on the matter said.

Representatives for Knight and Peak6 w ere not immediately available for comment. Citadel and Virtu declined to comment. In a statement, R.J. O'Brien said it “doesn't comment on rumor or speculation.”

Knight Rises, but Many Customers Fail to Return

After one of the darkest days in its 17 year history, the Knight Capital Group saw its stock rise sharply on Friday.

Shares in the beleaguered trading firm were up nearly 33 percent, to $3.43, as Knight officials told customers that it had financing lined up for the day, according to people with direct knowledge of the matter.

The move offered some relief. Knight has been battered by its disclosure of a $440 million loss tied to an errant trading program that moved the stocks of 148 companies earlier this week.

On Friday, Knight executives called other trading companies, telling them that the firm was seeking the return of customer orders. One person who received such a call was told that Knight believes it can now handle transactions.

However, many of the firm's biggest customers have yet to return. Vanguard, TD Ameritrade, E*Trade Financial and Scottrade are still refraining from sending trade orders through Knight, according to representatives f or each of the firms.

Kim Hillyer, a spokeswoman for TD Ameritrade, told DealBook that the brokerage was running internal tests to see if customers would be affected by a return to using Knight. “They've been a good partner and a trusted partner of ours for years,” she said.

It's unclear what other steps the firm might be taking as it tries to recover. Knight and its advisers have been soliciting potential suitors for various parts of its businesses, including rivals like Citadel and Virtu Financial, according to people briefed on the matter.

Knight spokeswoman was not immediately available for comment. News of the financing was reported earlier by The Wall Street Journal online.

Nathaniel Popper contributed reporting.

Business Day Live: Pace of Hiring Rose in July

Economy adds more jobs than expected, though the jobless rate ticks up. | An unexpected risk in stock trading. | Facebook's stock slide.

Insider Trading Case Reveals an Unsophisticated Scheme

“Stupid Pet Tricks” has always been a favorite David Letterman sketch. The criminal insider trading charges filed against a Bristol-Myers Squibb executive, Robert D. Ramnarine, may well qualify for “Stupid Insider Trading Tricks.”

Federal prosecutors charged Mr. Ramnarine with three counts of securities fraud for trading in takeover targets of Bristol-Myers, and the Securities and Exchange Commission also sued him. According to the complaint, the trading generated over $300,000 in profits.

The profits shows that even an unsophisticated scheme can produce a nice return â€" at least until it you are caught, which seems almost inevitable in this case.

Mr. Ramnarine is accused of buying options in three companies, Pharmasset, Amylin Pharmaceuticals and ZymoGenetics, while Bristol-Myers was negotiating potential transactions with them.

Most insider trading schemes try to hide the source of the information by using accounts registered in the names of others, and sometimes use overseas brokerage firms so that it will be more difficult to ferret out the identity of the traders. Nothing quite so sophisticated for Mr. Ramnarine, however, who bought options in his personal stock accounts at firms like Fidelity, E*Trade, and Scottrade, according to prosecutors.

About the only step to hide his affiliation with Bristol-Myers appears to be on a form submitted to Scottrade stating that his employer was Merck, not Bristol-Myers. That is hardly enough to throw even Inspector Clouseau off track, particularly when an earlier account application listed his employer as “BMS.”

When there is suspicious trading related to an acquisition, it is standard procedure for the S.E.C. to ask the companies for a list of those involved in the transaction. Mr. Ramnarine worked in the Bristol-Myers capital markets department, and likely had at least some role in conducting the due diligence on behalf of the company. Thus, his na me would have come to the attention of investigators at the S.E.C. once they decided to look into any suspicious trades.

According to the criminal complaint, Mr. Ramnarine also did a little research to try to avoid detection, conducting an Internet search for “”can stock option be traced to purchase inside trading.” Of course, there is an easy answer to that question â€" “Yes!” â€" when you trade in an account in your own name based on information taken from your employer.

He also entered a trade order on his company-issued BlackBerry, the complaint said. This is not exactly how an insider trader who hoped to avoid arousing suspicion should act.

According to records from his office computer, he accessed three articles on the subject: “Ways to Avoid Insider Trading,” “Types of Insider Trading” and “The Purpose of Insider Trading Laws.” The first article, from the Web site ehow.com, says, “Do not be afraid to forgo an illegal opportun ity.”

Mr. Ramnarine showed at least a bit of understanding about how to engage in insider trading by using options, which can be far more lucrative because they require a much smaller up-front investment and can generate fat returns. His transactions, according to the complaint, involved out-of-the-money calls and puts that were set to expire in a fairly short time frame, so the upfront costs were not significant compared with buying stock in the companies. But using options for insider trading is also dangerous because there are far fewer traders in the market, so it is easier for the S.E.C. to single out well-timed transactions that can trigger a full-scale investigation.

Greed is often the downfall of an inside trader, not surprisingly. It is hard to resist going for a bigger score because making the money seems so easy and there is no “real” victim of the conduct.

That appears to have been the case with Mr. Ramnarine. In his first options trade s in ZymoGenetics, prosecutors said he made about $30,000, an amount that might well have avoided triggering any scrutiny from market regulators. Indeed, if he had stopped right then, there is a good chance he would have gone undetected.

But inside information can be addictive, and the lure of greater profits is hard to resist. Mr. Ramnarine's second set of trades, made more than a year later, earned approximately $225,000 in less than two weeks, the complaint said. That is more than enough to raise the interest of the S.E.C.

If Mr. Ramnarine, who did not enter a plea on Thursday, decides to fight the charges, it will be difficult to claim ignorance. For one, the complaint alleges that he searched the S.E.C. Web site from his office computer and accessed a release about another pending insider trading case. So proof of intent should be easy for prosecutors to establish.

Mr. Ramnarine's trading raises the question whether anyone is actually deterred by the Justice Department's recent crackdown on insider trading. Many of his options transactions involving Amylin took place in June 2012, when the high-profile prosecution of Rajat K. Gupta was playing out in the Federal District Court in Manhattan. The week after the conviction, Mr. Ramnarine made the largest trades, so the case did not appear to have any impact on him.

It would be hard to miss the message that federal prosecutors are focusing on insider trading, yet Mr. Ramnarine appears to have blithely gone ahead, if the allegations are true. Under the Federal Sentencing Guidelines, the recommended prison term will be two to three years, so if he is convicted he will pay a heavy price for some pretty unsophisticated insider trading.

Peter J. Henning, who writes White Collar Watch for DealBook, is a professor at Wayne State University Law School.

Heineken to Buy Stake in Asia Pacific Breweries for $4.1 Billion

LONDON - Heineken extended its reach into Asia on Friday after the Dutch brewer agreed to buy a stake in one the region's biggest brewers for roughly $4.1 billion.

The European company, which already owns a 42 percent holding in Asia Pacific Breweries, will acquire a further 40 percent stake in the beer company from Fraser and Neave, a Singapore-listed conglomerate and longstanding partner of Heineken in the region.

The deal underscores the European brewer's interest in fast-growing emerging markets.

Listed in Singapore, Asia Pacific Breweries operates 30 breweries across Asia, including in far-flung counties like Mongolia, Papua New Guinea and the Solomon Islands. Its brand portfolio includes Tiger Beer and Bintang lager, some of the best-known beers in the regional markets where they are sold.

The Dutch company previously said a successful deal would give it “direct access to a number of important markets, including Cambodia, China, Indonesia, Malaysia, New Zealand, Papua New Guinea, Singapore, Thailand and Vietnam.”

Larger global brewers are looking to deal-making as growth slows in their home markets.

In June, Anheuser-Busch InBev, whose beer brands include Budweiser and Stella Artois, agreed to buy the half of the Mexican brewer Grupo Modelo that it did not already own for $20.1 billion. Rival SABMiller bought Foster's Group, the biggest beer company in Australia, for $10.15 billion last year.

Asia Pacific Breweries has been in play for weeks. Last month, Thai Beverage, controlled by the billionaire Charoen Sirivadhanabhakdi, initially offered to buy a 22 percent stake in Fraser and Neave for $2.2 billion. Heineken countered in late July, offering to buy a 40 stake for roughly $4.1 billion. The Dutch brewer had set an Aug. 3 deadline for Fraser and Neave's board to accept its offer.

The agreement on Friday will trigger a requirement that the Dutch company make a mandatory buyout offer to remaining shareholders of the Asian brewer. The purchase of the remaining shares is expected to cost $1.9 billion. The deal is expected to close at the end of the year.

In early afternoon trading on Friday, shares in the European company rose 3.6 percent.

Credit Suisse and Citigroup advised Heineken on the deal.

Morning Take-Out

Errant Stock Trades Reveal a Risk That Few Anticipated  |  The trading firm Knight Capital recently rushed to develop a computer program so it could take advantage of a new Wall Street venue for trading stocks. But the firm ran up against its deadline and failed to fully work out the kinks in its system, according to people briefed on the matter. In its debut Wednesday, the software went awry, swamping the stock market with errant trades and putting Knight's future in jeopardy.

The fiasco, the third stock trading debacle in the last five months, revived calls for bolder changes to a computer-driven market that has been hobbled by its own c omplexity and speed. Among the proposals that gained momentum were stringent testing of computer trading programs and a transaction tax that could reduce trading.

In the industry, there was a widespread recognition that the markets had become more dangerous than even specialists realized.“What is starting to become clear is that the costs in terms of these random shocks to the system are occurring in ways that people never anticipated,” said Henry Hu, a former official at the Securities and Exchange Commission and a professor at the University of Texas in Austin.

Knight, founded in 1995, is a leading matchmaker for buyers and sellers of stocks, handling 11 percent of all trading in the first half of this year, according to the data firm Tabb Group. Knight lost three-quarters of its market value in the last two days, in addition to losing $440 million from the errant trades, and was scrambling to find financing or a new owner.
Deal Book '

DEAL NOTES

Heiress's Apartment in Contract to Private Equity Chief  |  Frederick Iseman, chief executive of private equity firm CI Capital Partners, has agreed to buy an apartment owned by the heiress Huguette Clark, who died last year, for $22.5 million, but the deal is subject to approval by the building's board, The Wall Street Journal reports, citing unidentified people familiar with the transaction. Another apartment of Ms. Clark's in the same building was recently purchased by the hedge fund manager Boaz Weinstein.
WALL STREET JOURNAL

London's Financiers Lay Low at the Olympics  |  When Carsten Kengeter, co-head of UBS's investment bank, took a client to the Olympics, the pair jo ined commuters on public transportation, The Wall Street Journal reports.
WALL STREET JOURNAL

Disappointment After a European Policy Meeting  |  A week after the president of the European Central Bank, Mario Draghi, said he would “do whatever it takes to preserve the euro zone,” he acknowledged on Thursday that whatever it takes could take weeks or months, The New York Times reports.
NEW YORK TIMES

Mergers & Acquisitions '

Heineken Said to Reach Deal for Singapore Brewery  |  Heineken agreed to buy a controlling stake in Asia Pacific Breweries from Fraser and Neave, in a deal worth at least $4 billion, Reuters reports, citing unidentified people with knowled ge of the situation.
REUTERS

McGraw-Hill Said to Receive Bids for Education Unit  |  Buyout firms including Bain Capital and Thomas H. Lee Partners submitted bids for McGraw-Hill's education business, which could be valued at roughly $3 billion, unidentified people familiar with the matter told Reuters.
REUTERS

Companies Borrow More to Finance Deals  |  Bloomberg News reports: “Companies are borrowing the most in the loan market since 2008 to finance acquisitions worldwide, betting that they can quickly replace the debt with permanent financing as yields on corporate bonds fall to records.”
BLOOMBERG NEWS

China Telecom Said t o Plan $19 Billion Asset Purchase  |  China Telecom is said to be planning to pay more than $19 billion for 3G wireless assets owned by its parent company, according to Reuters, which cites two unidentified people.
REUTERS

HSBC to Shed Shipping Consultancy Unit  |  HSBC said it agreed to sell HSBC Shipping Services, its shipping consultancy arm, to the unit's management for an undisclosed amount, Reuters reports.
REUTERS

Glaxo Completes Acquisition of Human Genome  |  GlaxoSmithKline said it finalized its $3 billion acquisition of Human Genome Sciences, gaining rights to new drugs.
REUTERS

Su n Pharmaceuticals of India Said to Eye German Drug Maker  |  Sun Pharmaceuticals has sought to raise $1 billion for a deal in Europe and has its eye on the German generic drug maker Stada Arzneimittel, Bloomberg News reports, citing unidentified people familiar with the matter.
BLOOMBERG NEWS

INVESTMENT BANKING '

Royal Bank of Scotland Records $3 Billion Loss in First Half  |  The British bank reported a net loss of $3.09 billion in the first half of the year after it took an accounting charge on its debt and other one-off charges.
DealBook '

For Wall Street, Real Pain When the Fed Fails to Act  |  A lack of new stimulus moves by the Federal Reserve and the European Central Bank this week may have a direct and painful impact on the chief source of revenue at investment banks on both sides of the Atlantic.
DealBook '

A Warning to Investors Is Buried in Details  |  Floyd Norris writes in his column in The New York Times that a particular investment sold by Wells Fargo “is illustrative of what can happen when a security is packaged by a firm that intends to have a contrary interest from its customers for the life of the security, and that does not clearly explain what could go wrong.”
NEW YORK TIMES

Citigroup's C.E.O. Ponders Succession Plans  |  The Wall Street Journal reports: “A lead contender is Mike Corbat, the head of Citigroup's oper ations in Europe, the Middle East and Africa, according to people close to the company. These people said that other executives who have won high marks from the board include Jamie Forese, the chief executive of securities and banking; and Jane Fraser, who runs Citigroup's private bank.”
WALL STREET JOURNAL

Citigroup Hires a Credit Trader From Morgan Stanley  |  Nick Gray is joining Citigroup as a senior credit trader in London, as the bank expands its credit trading business in Europe, Bloomberg News reports.
BLOOMBERG NEWS

Fidelity Said to Plan Exchange-Traded Funds  |  Fidelity Investments plans to become the first big mutual fund company to introduce exchange-traded funds, Bloomberg News reports.
BLOOMBERG NEWS

Pimco Fund Attracts $2.1 Billion of Deposits in July  |  The Pimco Total Return Fund, which is managed by Bill Gross, had its seventh straight month of net deposits, Bloomberg News reports.
BLOOMBERG NEWS

PRIVATE EQUITY '

TPG Capital Raises $2 Billion Fund  |  The private equity firm TPG Capital raised a fund to make growth-equity investments, a departure from its traditional buyout business, Bloomberg News reports.
BLOOMBERG NEWS

A Word of Caution on Private Equity  |  The Economist writes: “The largest leveraged buy-outs fared bette r than the doomsayers predicted. But private-equity firms have no right to boast.”
ECONOMIST

Apollo's 2nd-Quarter Profit Falls 84%  |  Apollo Global Management said on Thursday that profit tumbled by 84 percent in the second quarter, as its core private equity business grappled with difficult markets.
DealBook '

Fortress Results Show Strength in Private Equity  |  The Fortress Investment Group reported a second-quarter profit that was helped by growth in its private equity holdings, Bloomberg News reports.
BLOOMBERG NEWS

In China, Private Equity Moves Away From I.P.O.'s  |  Reuters writes tha t a recent deal by the Carlyle Group “underscored how funds are increasingly moving away from their traditional exit route of listing mainland assets in stock markets. Historically, I.P.O.'s had been the dominant exit strategy for buyout funds investing in China.”
REUTERS

HEDGE FUNDS '

Third Point Puts a Focus on Kraft  |  A position in Kraft Foods was one of the biggest holdings of the hedge fund Third Point in July, according to a monthly investor report, Reuters reports, but the note does not say whether the position was long or short.
REUTERS

Will Others Follow Moore Capital's Lead?  |  Moore Capital Management made a surprise decision to return about 25 percent of its main fund to investors, but Reuters writes that the move may “be an isolated decision made by a billionaire who has delivered double-digit returns over two decades.”
REUTERS

An Oil-Focused Fund Logs a Gain  |  Astenbeck, a commodities hedge fund that has been stubbornly bullish on oil, had its first gain since February, rising 4 percent in July, Reuters reports.
REUTERS

British Hedge Fund Applauds European Plan  |  Stephen Jen, who runs the London-based firm SLJ Macro Partners, has been bearish on the euro, but he expressed approval of a new plan by the European Central Bank, The Wall Street Journal reports.
WALL STREET JOURNAL

I.P.O./OFFERINGS '

JAL Plans an I.P.O. to Raise $8.5 Billion  |  On paper, Japan Airlines is on track for a strong recovery after it eliminated one-third of its work force, or about 16,000 jobs, dropped unprofitable routes and slashed pensions.
DealBook '

2 Executives to Leave Facebook  |  Facebook's stock dropped on Thursday to a record low after two senior executives said they would leave the company.
BLOOMBERG NEWS

California Lowers Expectations for Facebook-Related Taxes  |  As a result of the slide in Facebook's stock price, state taxes related to the company's I.P.O. could be “hundreds of millions of dollars” less than the $1.5 billion initially expected, California said, according to The Financial Times.
FINANCIAL TIMES

VENTURE CAPITAL '

Yahoo Chief Invests in a Car-Sharing Service  |  Marissa Mayer, the new chief executive of Yahoo, was among the investors in a $13.9 million financing round for Getaround, VentureBeat reports.
VENTUREBEAT

Russian Mogul Backs a Music-Streaming Start-Up  |  Len Blavatnik, owner of the Warner Music Group, has purchased a small stake in Deezer, a European rival to Spotify, The New York Post reports, citing unidentified people.
NEW YORK POST

Mobile Payments Service Attracts $21 Million  |  LevelUp, a payments service that is part of the start-up SCVNGR, raised $9 million from the venture capital arm of Deutsche Telekom, to complete a two-part, $21 million round of financing, VentureBeat reports.
VENTUREBEAT

Venture Capital Investment Falls in China  |  As China's economic growth slowed, venture capital investment in Chinese companies fell 43 percent in the first half of the year to $1.9 billion, Dow Jones reports.
DOW JONES

LEGAL/REGULATORY '

Japan Widens Inquiry Into Insider Trading  |  A Japanese investigation into insider trading has extended onto the trading floors of some of Wall Street's largest companies, including Goldman Sachs.
DealBook '

Bristol-Myers Executive Is Accused of Insider Trading  |  Robert Ramnarine is accused of buying call options in ZymoGenetics, Pharmasset and Amylin Pharmaceuticals before they were acquired by Bristol-Myers Squibb.
DealBook '

Former Diamondback Manager Is Spared Prison  |  A judge sentenced Anthony Scolaro, a former portfolio manager at Diamondback Capital Management, to three years of probation, after he pleaded guilty to insider trading, Reuters reports.
REUTERS

A.I.G. Profit Buoyed by Tax Benefits  |  A.I.G. said its profit in the second quarter rose to $2.33 billion from $1.84 billion a year earlier, helped by tax benefits, Reuters reports. The insurer said it had $11 billion in liquidity at the parent company level that it could use to buy back shares from the government.
REUTERS

Proposal to Split Banks Gains Traction in Iceland  |  After suffering a dramatic financial collapse, Iceland is now on track to become “the first western nation since the global financial crisis hit five years ago to force banking conglomerates to split their business,” Bloomberg News reports.
BLOOMBERG NEWS

S.E.C. Official Who Oversaw Hedge Funds to Retire  |  Robert Plaze, a deputy director of the Investment Management division of the Securities and Exchange Commission, is retiring at the end of August after nearly 30 years at the agency, Reuters reports.
REUTERS

Royal Bank of Scotland Records $3 Billion Loss in First Half

LONDON - Royal Bank of Scotland reported a net loss Friday of £1.99 billion, or $3.08 billion, in the first half of the year after it took an accounting charge on its debt and other one-off charges.

The Edinburgh-based bank, which is 82 percent owned by the British government after receiving a bailout, set aside £125 million to compensate customers for a recent technology problem and a further £135 million for the inappropriate selling of insurance to clients.

Royal Bank of Scotland said regulators continued to investigate its role in the manipulation of the London interbank offered rate, or Libor.

The firm has dismissed a number of individuals in relation to the inquiries, while several of its employees have been named as defendants in American lawsuits connected to the rate-rigging scandal, according to a company statement.

The bank said it could not estimate the amount of future potential fines or when any announcement connected to the Libor investigations would be made.

“We are in a chastening period for the banking industry,” Royal Bank of Scotland's chief executive, Stephen Hester, said in a statement. “The consequences of these mistakes have seen the reputation of the sector fall to new lows.”

Royal Bank of Scotland's loss in the six months through June 30 came after it recorded a £2.97 billion accounting charge on its own debt. The first-half figures compared to a £1.42 billion loss over the same period last year. Revenue fell 8 percent, to £13.29 billion.

The bank's operations continued to suffer from weak consumer spending as the fallout from the European debt crisis affected the retail and corporate banking units.

Royal Bank of Scotland also has been paring back its investment banking division in response to the current economic climate. That unit reported a 29.6 percent drop its operating profit, to £264 million, in the first six mont hs of the year.

The British bank said it had cut its work force by 5,700 over the period, primarily from its markets and international banking division.

Royal Bank of Scotland has been slashing its assets to improve profitability, and it said it had cut its non-core assets by £22 billion, to £72 billion, during the first half of the year. That figure stood at £258 billion in September 2009.

The firm's core Tier 1 ratio, a measure of a bank's ability to weather financial shocks, rose slightly to 11.1 percent.

JAL Plans an I.P.O. to Raise $8.5 Billion

TOKYO - Japan Airlines, the former flagship carrier driven to bankruptcy and a government bailout two years ago, will relist its stock in Tokyo on Sept. 19 in an initial public offering that could raise $8.5 billion.

A government-backed fund that owns the airline and has led its restructuring will sell 175 million shares at a tentative price of 3,790 yen a share, recouping its investment, Japan Airlines said Friday in a filing with the Tokyo Stock Exchange.

On paper, the airline, also known as JAL, is on track for a strong recovery after it eliminated one-third of its work force, or about 16,000 jobs, dropped unprofitable routes and slashed pensions. JAL said Thursday that its net income had more than doubled in the three months through June to 26.9 billion yen ($343 million), as a strong yen buoyed international travel from Japan.

But the airline owes much of its turnaround to the government bailout, as well as generous provisions that will allow it to f orgo billions of dollars in future tax payments. Critics including the airline's rival, All Nippon Airways, have said such provisions have given JAL an unfair edge that distorts competition.

Other critics worry that JAL has not addressed the structural problems that led to the government bailout, making it a weak prospect in the increasingly cutthroat global airline industry. JAL has little in the way of a low-cost carrier strategy, they say, despite a surge in low-cost plane travel in Asia.

And JAL's sharply reduced capacity will greatly handicap its attempts to regain its standing among the world's biggest airlines, especially compared to giants like Singapore Airlines and Emirates, which have both invested heavily in large aircraft.

By contrast, JAL has retired its jumbo jets and now runs a modest fleet centered on midsize planes, which might improve profitability in the short term but leaves it less able to capitalize on surging air travel, especially i n Asia.

Despite the turnaround, JAL itself predicts lower profits going forward, starting with 130 billion yen in the year through March 31, lower than the 187 billion yen it booked last fiscal year.

In a statement, JAL's president, Yoshiharu Ueki, said the airline was aware of the many challenges it now faces.

“The relisting will merely put us on the starting line to a turnaround,” Mr. Ueki said.

News Analysis: An Automated Jolt for the Markets

Scott Eells/Bloomberg News

The New York Mercantile Exchange last month. Computers that make high-frequency trades - like the ones that started the mishap Thursday on Wall Street - started in stock markets but have since spread to commodities exchanges.

Financial markets have greatly improved over the past quarter-century. Trading costs, whether for small individual investors or large institutional investors, have declined sharply. The cuts going to middlemen are smaller, and many markets are deeper and more liquid than ever.

Most of the time.

Unfortunately, the improved markets also are more prone to disaster. The same computerization and increased competition that provided the benefits also weeded out people who had the obligation to step up in times of stress, and virtually eliminated the ability of people and institutions to slow or halt markets when something goes badly wrong.

And with technological innovation continuing apace, the risks may have increased. Regulators can require changes that will prevent an exact repeat of any given disaster, as they did after the flash crash of May 6, 2010, but there appears to be no way to guess what will be the immediate cause of the next problem. And that problem may be huge. On Wednesday, computers at , a firm that executes millions of stock trades every day, went haywire.

Unintended orders spewed forth and some stocks gyrated wildly. It took the firm the better part of an hour to turn off its computers, and on Thursday it estimated its losses at $440 million.

Knight, one of the biggest players in the stock market, said it was exploring strategic alternatives. That is a polite way of saying it is desperately searching for a buyer.

It may be worthwhile to consider what would have happened a few decades ago had a computer somehow done the same thing.

The orders would have flooded into specialists at the - people who had a duty to make markets - or to the market makers in Nasdaq stocks who had a similar responsibility. Some of the stupid orders might have been executed, but trading in the affected stocks would have come to a halt within minutes while people tried to figure out what was going on. There would have been red faces at the firm responsible, but much less red ink.

Those market makers are largely gone now. Their sources of profit - the spreads between what they sold stocks for and what they would pay for them - have vanished with competition and rule changes that allow share prices to move by one cent or less, rather than the one-eighth of a dollar, or 12.5 cents, that used to be the minimum change.

Market makers have been largely replaced by high-frequency traders who use computers that can react to orders in nanoseconds. They send in orders - and cancel them - far faster than any human could hope to do.

Exchanges, knowing that they need market makers who will take the other side of customer orders, offer rebates to high-frequency traders who manage to fill a lot of orders. In normal times, the result is markets that are highly liquid and very fast.

Decades ago, the size of an order that could be executed was limited by the capital available to the stock exchange specialist, and it was necessary for Wall Street firms like Goldman Sachs and Salomon Brothers to fill the role for large institutional orders. There are enough high-frequency firms that big orders can now be filled quickly and at lower costs.

However, those high-frequency traders have no obligation to hang around and continue to make markets when things get dicey. There was plenty of criticism of the specialists and market makers in the old days. We are approaching the 25th anniversary of the 1987 crash, when many Nasdaq market makers panicked and decided that the safer course was to not answer their phones.

But the market makers generally met their responsibilities. If they were unwilling to do so, perhaps because of a flood of orders to sell a particular stock, the market in that stock would simply shut down for a time. That pause would give others time to see what was happening, and anyone who thought the market move was unreasonable could step in and offer to buy the stock.

Now, many of the high-frequency traders - who have no power to halt trading, even if their computers somehow concluded that was wise - have simply programmed their computers to get out of a market if it is going crazy. The result is that markets may have far less liquidity when that liquidity is needed most.

To get the advantages that come with being listed as market makers, high-frequency firms were required to usually have offers posted to buy and sell the stocks in which they made markets. That rule led to the stub bid. If things were going crazy, the firm would put in a bid of $1 a share for a $40 stock. It met the requirement, but obviously no one would be stupid enough to sell at that price.

Unless that someone were a computer.

Trying to Be Nimble, Knight Capital Stumbles

As the leader of one of the largest brokerage firms in the nation, Thomas M. Joyce has been an unapologetic advocate of electronic trading and one of the most vociferous critics of companies that struggled to keep up with the ever-changing stock market.

Now, Mr. Joyce, a longtime trader who seized the reins of the Knight Capital Group in 2002, is fighting for his company's survival.

In a bid to keep a grip on its customers, Knight pushed to introduce a new system that would position it competitively amid market changes that took effect on Wednesday, according to people briefed on the matter. Unlike rivals that hesitated, Knight Capital's presence on Day 1 would ensure bragging rights and extra profits.

But in the rollout of the system that morning, Knight created a blizzard of erroneous orders to buy shares of major stocks. The orders caused wild swings that affected the shares of more than 100 companies, including Ford Motor, RadioShack and American Air lines.

While the companies quickly recovered, the 17-year-old Jersey City firm was left reeling. Knight lost $440 million in selling all the stocks that it accidentally bought on Wednesday - more than its entire revenue in the second quarter of this year, when it brought in $289 million.

On Thursday, rattled customers like Citigroup, Fidelity Investments and Vanguard took their business elsewhere. Knight shares plunged 63 percent, to $2.58. The fallout prompted the company to contact JPMorgan Chase and other big banks for emergency financing.

The company is also facing an onslaught of regulatory scrutiny. The Securities and Exchange Commission's enforcement division is investigating potential legal violations, people briefed on the matter said.

As it faces the flight of confidence, Knight is desperately seeking potential buyers for parts of its business. On Thursday, Knight's senior executives reached out to hedge funds and some of their rivals in tra ding like Citadel and Virtu Financial, according to people briefed on the matter. But by day's end, interest was waning and rumors were swirling that the company would collapse into bankruptcy.

“With the events of yesterday, you have to question if this is the beginning of the end for Knight,“ said Christopher Nagy, founder of the consulting firm KOR Trading.

Knight Capital declined to comment. Within the company, the mood grew grimmer as hopes for a recovery dwindled, according to traders at Knight, who were not authorized to discuss the matter. Some employees slept at the company overnight on Wednesday.

“I am grateful that at this point I still have my job,” one trader said.

Originally named Roundtable Partners, in a nod to Arthurian legend, the trading company rose to prominence with the proliferation of high-speed electronic trading. In the first half of the year, Knight accounted for 11 percent of all stock trading in the United States.

The pressures to stay competitive, however, meant that the time between developing new trading software and putting it in use became shorter and shorter.

On Wednesday, the New York Stock Exchange began a program intended to loosen the stranglehold that brokerage firms like Knight had over retail investors. Under this program, trades from retail investors now shift to a special platform where trading houses compete to offer them the best price.

Knight sought to stay nimble. Over the last several weeks, the company tweaked its computer coding to push itself onto the new platform.

At least two competitors who declined to be named claimed that they took a more measured approach, choosing not to create new software to coincide with the debut. Some competitors questioned Knight's aggressive approach.

“The time between the approval of the software and the time it was implemented was incredibly quick,” said a head of equity trading at another firm, w ho added that the transition “seemed really fast.”

The errant trades on Wednesday quickly seized Wall Street's attention. Within seconds of the New York Stock Exchange's opening bell ringing at 9:30 a.m., Knight's computer coding malfunctioned.

The code was supposed to direct the firm's computers to react to trading. Instead, it placed its own runaway offers to buy and sell shares of big American companies, driving up the volume of trading to suspicious levels.

Officials at the exchange began noticing an enormous spike in volume shortly after the opening bell. Exchange officials soon touched base with the S.E.C. in Washington, which was monitoring the problem. A regulator stationed in the agency's market watch room sent out regular alerts to senior agency officials.

Within minutes, the authorities traced the problem to Knight.

Yet even after that detection, the New York Exchange had limited authority to take action. Most measures that curb e rratic trading are tied to wild swings in stock prices, whereas the problem at Knight was initially tied to the volume of trading and not the price of shares. In addition, circuit breakers that halt individual stocks do not work during the first 15 minutes of trading.

About 45 minutes into the debacle, the exchange shut down Knight's trading.

By the end of Wednesday, there were winners and losers.

Many big investors cashed in on the market volatility. They saw what was happening when the surprisingly large trades began to register, and they quickly moved to profit from the disruptions.

The winnings were spread from individual traders to proprietary firms that use specialized computer algorithms to spot and profit from market aberrations, including the DRW Trading Group. Hedge funds and other asset managers that trawl the market looking to profit from abnormal pricing also won big.

But while many institutional traders managed to profit from the f iasco, individual investors did not fare as well.

“It's the retail investor that gets hurt because they are not sitting in front of a computer watching the market all day,” said Scott Freeze, president of Street One Financial, a trade execution firm.

In the aftermath of the bruising day, the S.E.C. is taking a closer look at the firm's decisions. The agency is examining whether Knight properly tested the coding change - and whether it had proper internal controls to avert such a disaster.

S.E.C. examiners remain on the ground at the brokerage firm. Mary L. Schapiro, the agency's chairwoman, spoke with Mr. Joyce Wednesday afternoon.

Ultimately, the debacle is a significant blow to Mr. Joyce, 57, whose ambition came to define the rapid rise of the firm.

Mr. Joyce, who made his name at Merrill Lynch and Sanford C. Bernstein & Company, was a trusted ambassador of electronic trading. On June 20, he testified before a House Financial Services subc ommittee, arguing that the booming business democratized a stock market once dominated by a handful of cozy Wall Street firms.

He was also seen as an eager critic of other firms' missteps. In recent months, he excoriated Nasdaq for bungling the stock market debut of Facebook. The halting public offering of Facebook cost Knight $35.4 million.

“This was arguably the worst performance by an exchange on an I.P.O. ever,“ he said in an interview in May with CNBC.

When Mr. Joyce took control of Knight in 2002, he was charged with cleaning up the firm.

In 2004, Knight agreed to pay $79 million to the Securities and Exchange Commission to settle accusations of manipulating trading prices. Knight did not admit wrongdoing.

Just last month, however, some traders indicated they experienced problems when routing trades through Knight Capital. Craig Warner, head of trading at Capstone Investments, a research boutique firm, said that a few weeks ago an orde r he placed with Knight went wrong. The trade was supposed to be spread throughout the entire day, but a half-hour before the market close, the remainder of the trade was executed all at once.

“It was alarming because if the stock had been really moving, it could have been a big problem,” Mr. Warner said. “After having the issue I had last week and with the issue yesterday, I lost a lot of confidence in them,” he said, adding that he was no longer using Knight to clear trades.

Even on his first day at Knight, Mr. Joyce was greeted by irregular trading. On June 3, in 2002, the company's stock was suspiciously trading at 14 cents, after a software malfunction misread a Knight trader's order. Instead of placing an order to sell roughly one million shares of a penny stock, the system sold the firm's own stock.

In an interview with Institutional Investor magazine, Mr. Joyce recalled getting on the intercom that day and introducing himself. “I'm Tom Joy ce, he said, “and yes, I know that our stock is trading at 14 cents.”

Errant Trades Reveal a Risk Few Expected

The trading firm Knight Capital recently rushed to develop a computer program so it could take advantage of a new Wall Street venue for trading stocks.

But the firm ran up against its deadline and failed to fully work out the kinks in its system, according to people briefed on the matter. In its debut Wednesday, the software went awry, swamping the stock market with errant trades and putting Knight's future in jeopardy.

The fiasco, the third stock trading debacle in the last five months, revived calls for bolder changes to a computer-driven market that has been hobbled by its own complexity and speed. Among the proposals that gained momentum were stringent testing of computer trading programs and a transaction tax that could reduce trading.

In the industry, there was a widespread recognition that the markets had become more dangerous than even specialists realized.“What is starting to become clear is that the costs in terms of these random shocks to the system are occurring in ways that people never anticipated,” said Henry Hu, a former official at the Securities and Exchange Commission and a professor at the University of Texas in Austin.

Knight, founded in 1995, is a leading matchmaker for buyers and sellers of stocks, handling 11 percent of all trading in the first half of this year, according to the data firm Tabb Group. Knight lost three-quarters of its market value in the last two days, in addition to losing $440 million from the errant trades, and was scrambling to find financing or a new owner.

While the turbulence on Wednesday hit scores of individual stocks, the broader market took the spasm in stride, closing down less than 1 percent on Wednesday and Thursday. The S.E.C., which has opened an investigation into potential legal violations at Knight, said it was “considering what, if any, additional steps may be necessary.”

Some S.E.C. officials are pushing new measures that would force firm s to fully test coding changes before their public debut, according to a government official who spoke on the condition of anonymity. While the idea has long been discussed at the agency, it gained traction after the Knight debacle.

The S.E.C. applied limited safeguards on trading after the “flash crash” of 2010 sent the broader market plummeting in a matter of minutes. But big investors like T. Rowe Price, members of Congress and former regulators said Thursday that the S.E.C. and the industry had been too complacent and needed to do more to understand and control the supercharged market.

“Things are happening far too regularly,” said Ed Ditmire, an analyst at Macquarie Securities who focuses on stock exchanges. “It's not nearly as solid a market as it should be, so there's plenty of room for improvement.”

Arthur Levitt Jr., a former chairman of the Securities and Exchange Commission, said that recent events “have scared the hell out of inves tors” and called for the agency to hold hearings.

“I believe this latest event was handled better than the flash crash, but the larger question is whether our markets are adequate to deal with the technology that is out there,” Mr. Levitt said. “I don't think they are.”

Regulators have made changes to the markets over the last two decades that have taken it out of the hands of a few New York institutions and allowed dozens of high-frequency trading firms and new trading venues to dominate the stock market.

The high-speed firms like Knight, which connect directly to the servers of the exchanges and are capable of executing thousands of trades a second, are responsible for more than half of all activity in American markets. Companies that have benefited from the fragmentation and computerization of the markets have largely managed to fend off tighter controls by pointing to the steady decline in the cost of trading stocks.

Some large, institut ional investors, like Vanguard, have said that the increased volume of trading has made it easier to get in and out of stocks, lowering the ultimate costs for individuals who invest in popular vehicles like mutual funds.

But even people who had previously defended the advances in trading technology said on Thursday that too many problems had been overlooked.

In Knight's breakdown on Wednesday, as well as in the botched initial public offerings of Facebook in May and BATS Global Markets in March, the problems were caused by new computer programs that had not been adequately tested. Currently regulators have no protocol for signing off on new software programs like the one Knight rolled out.

“When they put these things out in the world they are really being tried for the first time in a real-life test,” said David Leinweber, the head of the Center for Innovative Financial Technology at the Lawrence Berkeley National Laboratory. “For other complex system s we do offline simulation testing.”

Mr. Leinweber has suggested to the S.E.C. that it do this work with the help of the supercomputing facilities at his center. The S.E.C. has recently moved in this direction by contracting with a high-speed trading firm that will provide it with more up-to-date market information.

Other changes to the markets would help slow trading during crises. Before computer trading became dominant, if a flood of unusual orders came in, they would usually be questioned by human order matchers, called specialists, working on the floor of the New York Stock Exchange.

To mimic that role, regulators are introducing a circuit breaker called the “limit up, limit down.” This forces a pause in trading of a stock if it starts occurring outside a normal price range. The mechanism will start in February.

“Quite literally, it could have stopped the flash crash,” said Gus Sauter, the chief investment officer at Vanguard.

The S.E.C. did introduce some circuit breakers after the flash crash but they stopped trading in only five of the stocks that were hit by Knight's faulty program.

Some critics of the current market structure have said that much bolder reform is needed. One change that has been contemplated is a financial transaction tax, which would force firms to pay a small levy on each trade. At the right level, this could pare back high-frequency trading without undermining other types, supporters say.

“It would benefit investors because there would be less volatility in the market,” said Representative Peter DeFazio, a Democrat of Oregon. He introduced a bill containing a financial transaction tax last year, but it has not found support.

Opponents of such a levy say that it could hurt the markets and even make it more expensive for companies to raise capital.

“I would be very concerned about unintended consequences,” said Mr. Sauter.

But Representative DeFazio, who favors a levy of three-hundredths of a percentage point on each trade, says he thinks the benefits of high-frequency trading are overstated. “Some people say it's necessary for liquidity, but somehow we built the strongest industrial nation on earth without algorithmic trading,” he said.

Benjamin Protess and Jessica Silver-Greenberg contributed reporting.

Japan Widens Inquiry Into Insider Trading

TOKYO - A government investigation into insider trading here has extended onto the trading floors of some of Wall Street's largest companies, including Goldman Sachs, UBS and Deutsche Bank.

Regulators are scrutinizing suspicious trading activity ahead of at least 12 public offering announcements over the last three years, said Tsutomu Okubo, head of the ruling Democratic Party's financial affairs committee. The committee has been working with regulators to stiffen insider trading laws in Japan.

Among the trades being investigated are those made by Goldman clients who bet against All Nippon Airways just days before the airline's stock offering last month. A company's share price typically drops when a new share issuance is announced.

Mr. Okubo's push for more disclosure comes as Japan's Securities and Exchange Surveillance Commission is set to discipline Nomura on Friday for mismanaging confidential information on share offerings. The commission is expecte d to issue an order and call for fundamental changes in the way the company, which is based in Tokyo, handles information, the Nikkei business daily reported.

Two top executives of Nomura, Japan's largest investment bank, have already resigned after acknowledging that in three cases, its sales staff tipped off its mutual fund customers about stock offerings that the bank was handling for its corporate clients.

The Nomura scandal has further undermined faith in Japanese stock markets, experts say, which remain some of the world's most depressed after the global financial crisis.

“The reckless pursuit of short-term profits by a handful of actors is destroying the reputation and value of the entire market,” said Mr. Okubo, a former managing director at Morgan Stanley.

The hard line taken by Japanese regulators comes as governments across the globe continue to crack down on insider trading. In Britain, the Financial Services Authority has become far m ore aggressive, bringing a rising number of insider trading cases, while federal prosecutors in Manhattan have charged at least 70 people with illegal trading over the last three years.

In Japan, Mr. Okubo said that his committee was interested in trades by funds, brokerage firms and asset managers ahead of a string of public share offerings over the last three years. The committee obtained data from the Tokyo bourse on short-selling activity - in other words, betting against stocks - ahead of a list of public offerings. Mr. Okubo said he had forwarded that list to the Securities and Exchange Surveillance Commission.

Among offerings on the list is the $2.6 billion issuance announced by All Nippon Airways on July 3. Filings made with the Tokyo bourse show short-sale positions on the stock taken out in the name of Nomura from June 25, eight days before the announcement, and in the name of Goldman from a day before.

In approximately three years before the ANA offering, neither Goldman nor Nomura made filings of short-sale positions on ANA shares. Trading volume of those shares jumped ahead of the issuance announcement, reaching a three-month high the day before, according to separate Tokyo Stock Exchange data.

Both Goldman and Nomura, who were underwriters for All Nippon's issuance, confirmed that the trades had been undertaken on behalf of clients but declined to comment further. They denied that information on the issuance could have leaked from their investment banking divisions to those clients.

Also on Mr. Okubo's list are short positions taken in the name of Deutsche Bank and UBS on shares of Nippon Sheet Glass before its $500 million stock offering, announced on Aug. 24, 2010. Deutsche and UBS both first filed short positions, likely on behalf of clients, starting on Aug. 6, according to Mr. Okubo and the exchange filings. Neither bank filed short positions on Nippon Sheet Glass in the year before that, the dat a shows. The banks declined to comment.

Analysts warn against assuming that all shorting activity made before a public offering is based on insider information. “It is not rocket science to pick out companies that are in danger of issuing equity,” Nicholas Smith, Japan strategist at CLSA Asia-Pacific Markets, wrote in a note to clients in May.

“Shorting stocks on credit analysis that indicates that an offering is in the offing is a legitimate - and valuable - part of the pricing mechanism of financial markets,” Mr. Smith said. “What is not legitimate is trading on leaks of nonpublic information.”

But Mr. Okubo insisted that many of the trading patterns were suspicious. He said it was crucial that regulators got to the bottom of who was behind the short-selling leading up to recent offerings, much of which remained unaccounted for.

Nomura has not faced any insider trading charges because, unlike the United States, Japan does not punish tips ters as long as they do not trade on the information. But a string of the bank's clients have decided to take their business elsewhere after the scandal, prompting the bank to reshuffle management and promise an overhaul of its internal compliance in a bid to regain investor confidence.

Nobutoshi Yamanouchi, a partner at the Tokyo branch of the law firm Jones Day, said financial regulators needed badly to convince global investors that they had the power to break into the cushy inner circle of Japanese finance and root out insider trading. The extent of regulators' actions against Nomura would be crucial, he said.

“They need to be able to show that they can make Japanese markets attractive for everyone again, not just for a select group of insiders,” Mr. Yamanouchi said.